Japanese 10-year bonds rally as BoJ keeps policy steady, weak risk sentiments

The Japanese 10-year government bonds rallied after Bank of Japan (BoJ) surprised market by leaving policy rate steady at -0.1 pct. Also, tumbling crude oil prices and weak equities drove investors towards the safe-haven assets. The benchmark 10-year bonds yield, which is inversely proportional to bond price down 23.73 pct to -0.073 pct by 0655 GMT.

The Bank of Japan in its policy meeting left the monetary policy rate unchanged at -0.1 pct, against the market expectation of ease. I also kept its asset purchase program at ¥80 trillion per annum and ¥300 billion into ETFs. The Bank of Japan in its policy statement said that they will take additional easing steps in three dimensions of quantity, quality and interest rate, if needed to hit price target and Japan consumer inflation to hit 2 pct in fiscal 2017. Said the Japanese economy is expected to rise moderately as a trend and negative impact on prices from energy price falls likely to remain until early next year. Moreover, the BoJ in its quarterly report lowed the forecast for real Gross Domestic Product (GDP) and Consumer Price Index (CPI) to 1.2 pct and 0.1 pct, from 1.5 pct and 0.3 pct in 2016 and 2017, respectively. Real GDP is expected to be +1.0 pct in fiscal year 2018/19. Similarly, core CPI is to expected to be +0.5 pct and 1.7 pct, from 0.8 pct and 1.9 pct in FY2016 and FY2017, respectively. In fiscal year 2018-19 core CPI is expected to grow 1.9 pct.

The Bank of Japan’s Governor Kuroda said in a press conference after monetary policy decision that weakness in output, exports due to developing nations and Japanese corporate sentiment seen at favourable level. Said inflation expectations have weakened lately it is hard to see positive impact of monetary policy due to uncertainty about overseas economies. The delay in price target partly reflects smaller than expected wage gains and the BOJ remains strongly committed to achieving price target as he doesn't see any limit to BOJ monetary policy, he added.

The Japanese March National CPI (excluding fresh food) tumbled -0.3 pct y/y (lowest since April 2013), against market expectation of -0.2 pct y/y, from flat 0.0% in February. On the other However, national CPI-excluding food, energy rose 0.7 pct y/y, lower than the market expectation of 0.8 pct y/y, from prior 0.8 pct. Similarly, March overall household spending decline 5.3% y/y, investors were anticipating a fall of 4.1 pct, from up 1.2 pct in February.

The Japanese bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of Japan's target. Today, crude oil prices tumbled after snapping to 2016 high on profit taking and report of a bigger-than-expected growth in the U.S. crude inventories has spurred some risk-averse behaviour. According to the US DOE, crude inventories increased 2 million barrels, as compared to prior 2.1 million barrel for the week ending 22 April. This came alongside an increase seen in gasoline inventories of 1.6 million barrels, against prior -0.1 million barrels and a decrease in distillate inventories of -1.7 million barrels, from down -3.6 million barrels. The International benchmark Brent futures fell 0.49 pct to $46.70 and West Texas Intermediate (WTI) tumbled 0.71 pct to $45.01 by 0655 GMT.

Moreover, the BoJ's adoption of negative rates in January has driven JGB yields below zero, while also increasing its market volatility. Meanwhile, Nikkei 225 closed down -3.61 pct at 16,666.05.